nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒09‒11
29 papers chosen by
Thomas Andrén

  1. Aggregate and distributional effects of increasing taxes on top income earners By Brüggemann, Bettina; Yoo, Jinhyuk
  2. Facing Demographic Challenges: Pension Cuts or Tax Hikes By George Kudrna; Chung Tran; Alan Woodland
  3. On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium By Krueger, Dirk; Ludwig, Alexander
  4. A nation without a corporate income tax: Evidence from nineteenth century Japan By Kazuki Onji; John P. Tang
  5. Optimal Taxation with Behavioral Agents By Emmanuel Farhi; Xavier Gabaix
  6. Austerity and Households Expenditure By Paolo Surico; Riccardo Trezzi
  7. Were we really all in it together? The distributional effects of the 2010-2015 UK Coalition government's tax-benefit policy changes: an end-of-term update By Paola De Agostini; John Hills; Holly Sutherland
  8. Benefit Losses Loom Larger than Taxes: The Effects of Framing and Loss Aversion on Behavioural Responses to Taxes and Benefits By Avram, Silvia
  9. Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience By Goodness C. Aye; Mehmet Balcilar; Rangan Gupta; Charl Jooste; Stephen M. Miller; Zeynel Abidin Ozdemir
  10. SIMTASK: A Microsimulation model of the Slovak Tax-Benefit System By Zuzana Siebertova; Norbert Svarda; Jana Valachyova
  11. Republic of Poland: Technical Assistance Report-Tax Administration-Modernization Challenges and Strategic Priorities By International Monetary Fund. Fiscal Affairs Dept.
  12. Environmental tax reform in a federation with rent-induced migration By Jean-Denis Garon; Charles Séguin
  13. VAT efficiency in the countries worldwide By Sokolovska, Olena; Sokolovskyi, Dmytro
  14. A self-funding rewawrd mechanism for tax compliance By Enrique Fatas; Daniele Nosenzo; Martin Sefton; Daniel John Zizzo
  15. A Self-Funding Reward Mechanism for Tax Compliance By Enrique Fatas; Daniele Nosenzo; Martin Sefton; Daniel John Zizzo
  16. Wealth distribution across communities of adaptive financial agents By Pietro DeLellis; Franco Garofalo; Francesco Lo Iudice; Elena Napoletano
  17. Income inequality, economic growth, and the effect of redistribution By Gründler, Klaus; Scheuermeyer, Philipp
  18. The challenge of measuring UK wealth inequality in the 2000s By Alvaredo, Facundo; Atkinson, Tony; Morelli, Salvatore
  19. Social assistance and minimum income benefits: Benefit levels, replacement rates and policies across 33 countries, 1990-2009 By Wang, Jinxian; Van Vliet, Olaf
  20. Estimating the Effects of South Africa's Youth Employment Tax Incentive – An Update By Vimal Ranchhod; Arden Finn
  21. Stochastic Transfers, Risky Investment and Incomes: Evidence from an Income Guarantee Program in Thailand By Wagener, Andreas; Zenker, Juliane
  22. The Effectiveness of Fiscal Stimuli for Working Parents By de Boer, Henk-Wim; Jongen, Egbert L. W.; Kabátek, Jan
  23. Measuring and Explaining International Differences in Hours Worked By Nicola Fuchs-Schuendeln; David Lagakos; Alexander Bick
  24. Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations By Vivekinan Ashok; Ilyana Kuziemko; Ebonya Washington
  25. Towards a fiscal union? On the acceptability of a fiscal transfer system in the eurozone By Hebous, Shafik; Weichenrieder, Alfons J.
  26. German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-euro area imbalances? By Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
  27. On deficits and symmetries in a fiscal capacity By Hebous, Shafik; Weichenrieder, Alfons J.
  28. The Distributional Consequences of Public School Choice By Christopher Avery; Parag A. Pathak
  29. Costs of Change, Political Polarization, and Re-election Hurdles By Hans Gersbach; Philippe Muller; Oriol Tejada

  1. By: Brüggemann, Bettina; Yoo, Jinhyuk
    Abstract: We analyze the macroeconomic implications of increasing the top marginal income tax rate using a dynamic general equilibrium framework with heterogeneous agents and a fiscal structure resembling the actual U.S. tax system. The wealth and income distributions generated by our model replicate the empirical ones. In two policy experiments, we increase the statutory top marginal tax rate from 35 to 70 percent and redistribute the additional tax revenue among households, either by decreasing all other marginal tax rates or by paying out a lump-sum transfer to all households. We find that increasing the top marginal tax rate decreases inequality in both wealth and income but also leads to a contraction of the aggregate economy. This is primarily driven by the negative effects that the tax change has on top income earners. The aggregate gain in welfare is sizable in both experiments mainly due to a higher degree of distributional equality.
    Keywords: Top Income Taxation,Heterogeneous Agents,Incomplete Markets,Income and Wealth Inequality
    JEL: E21 E62 H21 H24
    Date: 2015
  2. By: George Kudrna; Chung Tran; Alan Woodland
    Abstract: In this paper, we investigate two .fiscal policy options to mitigate fiscal pressure arising from an ageing of Australian population: pension cuts or tax hikes. Using a computable overlapping generations model, we .nd that while the two policy options achieve the same .fiscal goal, the macroeconomic and welfare outcomes differ significantly. Future generations prefer pension cuts, whereas current generations prefer tax hikes to .finance age-related government spending commitments. Interestingly, taxing consumption or income results in opposing effects on macroeconomic aggregates and welfare across different skill types of households. Increases in the consumption tax rate have positive effects on labour supply, domestic assets and output per capita (similarly to pension cuts), but reduce the welfare of low income households most. Conversely, increases in progressive income or payroll taxes have negative effects on most macroeconomic aggregates but reduce the welfare of low income households least. Our results highlight the intra- and inter-generational conflicts of interest and political constraints when implementing any structural fiscal reforms.
    Keywords: : Demographic Transition, Fiscal Cost, Fiscal Policy, Welfare, Overlapping Generations, Dynamic General Equilibrium
    JEL: H2 J1 C68
    Date: 2015–04
  3. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    Keywords: education subsidy; progressive taxation; transitional dynamics
    JEL: E62 H21 H24
    Date: 2015–09
  4. By: Kazuki Onji; John P. Tang
    Abstract: This study provides evidence on tax distortion to organizational choices of firm using historical data. We utilize the 1887 introduction of a personal income tax (PIT) in Japan as a quasi-experiment to examine tax-motivated incorporation. We circumvent the data limitation in the 19th century by drawing on a firm-level dataset constructed from genealogies of Japanese corporations. The sample is 3,203 firm-year observations spanning 1880-1892. We find that the introduction of PIT affected the adoption of simpler types of corporations and increased the corporate share of establishments by about 3 percentage points. The evidence indicates the role of a corporate income tax as a backstop to maintain revenue performance of PIT.
    Keywords: Tax Avoidance, Organizational Form, Business Incorporation
    JEL: G34 H25 K34
    Date: 2015–05
  5. By: Emmanuel Farhi; Xavier Gabaix
    Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.
    JEL: D03 H0
    Date: 2015–09
  6. By: Paolo Surico (London Business School); Riccardo Trezzi (Board of Governors, Federal Reserve Bank)
    Abstract: A sudden change of national government in Italy at the peak of the sovereign crisis in December 2011 brought about a sizable fiscal consolidation that unexpectedly re-designed the municipal tax on residential and non-residential properties: the 'IMU' tax. We exploit municipal variation (unrelated to the local business cycle) in the amount of IMU tax paid across respondents of the Survey on Household Income and Wealth (SHIW) to identify the causal effect of austerity on consumption over a range of specifications that control for demographics, income, house price, property characteristics and regional fixed effects. The marginal propensity to consume out of the overall IMU tax change is about 0.25 but the average effect masks significant heterogeneity. One euro of tax paid on the main dwelling led to a significant reduction in household expenditure of about 90 cents while taxes on other residential properties (whose revenues almost tripled those on the main dwellings) triggered a small and insignificant decline. The contraction was far more pronounced among home-owners with low liquid wealth, and was concentrated on the purchase of vehicles. The direct contribution of the IMU reform on residential properties to the aggregate economy in 2012 was around -0.3% of GDP (or -9.3% of vehicles sales) against the backdrop of a tax revenue increase close to 1.2% of GDP.
    Date: 2015
  7. By: Paola De Agostini; John Hills; Holly Sutherland
    Abstract: This paper examines the distributional impacts of the changes to benefits, tax credits, pensions and direct taxes between the UK Elections in May 2010 and in May 2015. It also looks ahead to the longer-term effects of changes and plans that were announced by the 2010-2015 Coalition government, such as the complete introduction of Universal Credit and changes to the ways benefits, pensions and tax brackets are indexed from year to year, modelling what effects these would have after five more years. It shows that the changes 2010-15 did not have a common effect on all household incomes and nor did the direct tax-benefit changes contribute to deficit reduction. In effect reductions in benefits and tax credits financed part of the cuts in direct taxes. We find that the relative extent to which the changes most favoured the rich or the poor is sensitive to a wide range of analytical choices and assumptions, but under most sets of assumptions the main gains were in the upper middle of the income distribution and the main losers were at the bottom and those close to, but not at, the very top. Across most of the distribution the impact of the changes was regressive. Looking forward to the effects that Coalition policies would have had by 2020 we find a more strongly regressive picture but with open questions about the effect of Universal Credit on those not currently receiving their entitlements to means-tested payments, and so potentially increasing some of the lowest incomes.
    Keywords: Income distribution, direct taxes, social security, United Kingdom, Coalition government
    JEL: D31 H23 H53 I32
    Date: 2015–09
  8. By: Avram, Silvia
    Abstract: A substantive body of research highlights the existence of framing effects in labour supply responses to taxation challenging traditional models that assume taxes only influence behaviour via the budget constraint. Using a lab experiment, this paper examines the presence of differential responses to identical marginal tax schedules coming from direct taxation and from benefit withdrawal respectively. In an incentivised real-effort task, subjects supply time and effort while facing an incentive structure that is framed as taxation or benefit withdrawal respectively, while yielding the exact same budget constraint. Results indicate that subjects in the benefit withdrawal condition are more likely to reduce working time compared to both subjects in the tax treatment and a control group where the incentive structure is described without using the language of taxes and benefits. The effect is driven by loss-averse individuals suggesting that benefit streams may be subject to an ‘endowment effect’. The findings have clear implications for welfare policy design.
    Date: 2015–08–20
  9. By: Goodness C. Aye (Department of Economics, University of Pretoria); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria); Stephen M. Miller (Department of Economics, University of Nevada); Zeynel Abidin Ozdemir (Department of Economics, Gazi University)
    Abstract: This study assesses how fiscal policy affects the dynamics of asset markets, using Bayesian vector autoregressive models. We use sign restrictions to identify government revenue and government spending shocks, while controlling for generic business cycle and monetary policy shocks. In addition to examining the effects of anticipated and unanticipated revenue and spending shocks, we also analyse three types of fiscal policy scenarios: a deficit-financed spending increase, a balanced budget spending increase (financed with higher taxes), and a deficit-financed tax cut (revenue decreases but government spending stays unchanged). Using South African quarterly data from 1966:Q1 to 2011:Q2, we show that a deficit spending shock does not affect house prices, but temporarily exerts a positive effect on stock prices. With a deficit-financed tax cut shock, house prices increase persistently while stock prices increase quickly, but only temporarily. A balanced budget shock permanently decreases house prices and temporarily reduces stock prices.
    Keywords: Bayesian Sign-Restricted VAR, fiscal policy, housing prices, stock prices
    JEL: C32 E62 G10 H62
    Date: 2014
  10. By: Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: In this paper we introduce a microsimulation model of the Slovak tax and transfer system SIMTASK. It presents a complex toolkit for static microsimulations. Compared to earlier version of the CBR microsimulation model, simulated results are closer to reality. This has been achieved by recalibrating sample weights of the input database, where the income distribution has been taken into account directly. The improved fit is documented by validating the tax and transfer aggregates using both the original sample weights and the new ones against external data. Along with some other refinements to the model and external data considerations, the paper concludes that the validity of SIMTASK improved in terms of personal income tax simulations, social security contributions simulations, as well as simulations of family related benefits.
    Keywords: microsimulation, EUROMOD, tax and benefit policy,Slovakia
    JEL: C81 I38 H24
    Date: 2015–08
  11. By: International Monetary Fund. Fiscal Affairs Dept.
    Abstract: This Technical Assistance Report provides advice on the modernization of the tax administration in Poland. Tax collections in Poland as a percentage of GDP are lower than those found in larger European Union member states. The report discusses collection performance of the main taxes in recent years and the approach to tax administration modernization. It also addresses selected issues concerning the tax administration institutional reform; the administration and delivery of core tax administration operations, including for the largest taxpayers; and the approach to managing compliance risks to the tax system.
    Keywords: Poland;tax, tax administration, taxpayers, taxes, tax offices
    Date: 2015–05–04
  12. By: Jean-Denis Garon (ESG-UQAM, CESIfo and CIRPEE); Charles Séguin (ESG-UQAM and CIREQ)
    Abstract: We study the welfare effects of a revenue-neutral green tax reform in a federation. The reform consists of increasing a tax on a polluting input and reducing that on labor income. Households are fully mobile within the federation. Regions are unequally endowed with a nonrenewable natural resource. Resource rents are owned by regions and are redistributed to citizens on a residence basis, which generates a motive for inefficiently relocating to the resource-rich jurisdiction. Since the resource-poor region has a higher marginal product of labor than does the resource-rich region, the tax reform mitigates the scope of inefficient migration. This positive welfare effect may significantly reduce abatement costs of pollution and calls for higher environmental tax, as compared with a model where migration is assumed away.
    Keywords: Federalism, Environment, Taxation, Equalization, Mobility
    JEL: D62 H21 H23 H77
    Date: 2015–09
  13. By: Sokolovska, Olena; Sokolovskyi, Dmytro
    Abstract: The article aims to estimate the efficiency of value-added tax (VAT) collection in the countries worldwide. In a large part of developing and transition countries VAT performs primarily fiscal function, being the main source of budget revenue (for example in 2014 in Ukraine the revenue obtained from VAT was 51% of total tax revenue, in Moldova it achieved 58,2%). At the same time the shadow economy particularly in form of corruption and tax evasion that exists in these countries leads to a considerable tax gap which in turns reduces VAT efficiency. So, the present study intends to define the VAT efficiency ratio in countries of the world. Preliminary theoretical and methodological analysis allowed us to use for calculations a modification of widespread formula, considering in a certain way a tax evasion process. We investigated the dependence between VAT efficiency ratio and size of shadow sector and level of corruption in countries. This research will allow further investigation of the strategies for establishing of optimal VAT rates depending on efficiency of its levying and size of taxpayers which in turns will contribute to raising efficiency of VAT administration, to the reduction of shadow sector and to the economic growth.
    Keywords: VAT, efficiency, shadow sector, corruption
    JEL: C10 D73 E26 H21
    Date: 2015
  14. By: Enrique Fatas (University of East Anglia); Daniele Nosenzo (University of Nottingham); Martin Sefton (University of Nottingham); Daniel John Zizzo (Newcastle University)
    Abstract: We compare in a laboratory experiment two audit-based tax compliance mechanisms that collect fines from those found non- compliant. The mechanisms differ in the way fines are redistributed to individuals who were either not audited or audited and found to be compliant. The first, as is the case in most extant tax systems, does not discriminate between the unaudited and those found compliant. The second targets the redistribution in favor of those found compliant. We find that targeting increases compliance when paying taxes generates a social return. We do not find any increase in compliance in a control treatment where individuals audited and found compliant receive symbolic rewards. It is not the mere assigning of rewards, but the material incentives inherent in the rewards that improve compliance. We conclude that existing tax mechanisms have room for improvement by rewarding financially those audited and found compliant.
    Keywords: tax evasion, rewards, audits
    JEL: C91 J26
    Date: 2015–08–24
  15. By: Enrique Fatas (Department of Economics, University of East Anglia); Daniele Nosenzo (Department of Economics, University of Nottingham); Martin Sefton (Department of Economics, University of Nottingham); Daniel John Zizzo (BENC and Newcastle University Business School, Newcastle University)
    Abstract: We compare in a laboratory experiment two audit-based tax compliance mechanisms that collect fines from those found non-compliant. The mechanisms differ in the way fines are redistributed to individuals who were either not audited or audited and found to be compliant. The first, as is the case in most extant tax systems, does not discriminate between the un-audited and those found compliant. The second targets the redistribution in favor of those found compliant. We find that targeting increases compliance when paying taxes generates a social return. We do not find any increase in compliance in a control treatment where individuals audited and found compliant receive symbolic rewards. It is not the mere assigning of rewards, but the material incentives inherent in the rewards that improve compliance. We conclude that existing tax mechanisms have room for improvement by rewarding financially those audited and found compliant.
    Keywords: tax evasion, rewards, audits
    Date: 2015
  16. By: Pietro DeLellis; Franco Garofalo; Francesco Lo Iudice; Elena Napoletano
    Abstract: This paper studies the trading volumes and wealth distribution of a novel agent-based model of an artificial financial market. In this model, heterogeneous agents, behaving according to the Von Neumann and Morgenstern utility theory, may mutually interact. A Tobin-like tax on successful investments and a flat tax are compared to assess the effects on the agents' wealth distribution. We carry out extensive numerical simulations in two alternative scenarios: i) a reference scenario, where the agents keep their utility function fixed, and ii) a focal scenario, where the agents are adaptive and self-organize in communities, emulating their neighbours by updating their own utility function. Specifically, the interactions among the agents are modelled through a directed scale-free network to account for the presence of community leaders, and the herding-like effect is tested against the reference scenario. We observe that our model is capable of replicating the benefits and drawbacks of the two taxation systems and that the interactions among the agents strongly affect the wealth distribution across the communities. Remarkably, the communities benefit from the presence of leaders with successful trading strategies, and are more likely to increase their average wealth. Moreover, this emulation mechanism mitigates the decrease in trading volumes, which is a typical drawback of Tobin-like taxes.
    Date: 2015–05
  17. By: Gründler, Klaus; Scheuermeyer, Philipp
    Abstract: Evidence from a current panel of harmonized worldwide data highlights a robust negative effect of income inequality on economic growth that we trace back to its transmission channels. Less equal societies tend to have less educated populations and higher fertility rates, but not necessarily lower investment shares. The first two effects are harmful for growth and reinforced by limited credit availability. Higher public spending on education attenuates the negative effects of inequality. In addition to the inequality-growth relationship, we examine the direct influence of effective redistribution. When net inequality is held constant, public redistribution negatively affects economic growth. Redistribution hampers investment and raises fertility rates. Combining the negative direct growth effect and the indirect positive effect operating through lower net inequality, the overall impact of redistribution is insignificant. Whereas this result stems mainly from advanced economies, redistribution is beneficial for growth in low and middle-income countries.
    Keywords: Economic Growth,Redistribution,Inequality,Panel Data
    JEL: O11 O15 O47 H23
    Date: 2015
  18. By: Alvaredo, Facundo; Atkinson, Tony; Morelli, Salvatore
    Abstract: The concentration of personal wealth is now receiving a great deal of attention – after having been neglected for many years. One reason is the growing recognition that, in seeking explanations for rising income inequality, we need to look not only at wages and earned income but also at income from capital, particularly at the top of the distribution. In this paper, we use evidence from existing data sources to attempt to answer three questions: (i) what is the share of total personal wealth that is owned by the top 1 per cent, or the top 0.1 per cent? (ii) is wealth much more unequally distributed than income? (iii) is the concentration of wealth at the top increasing over time? The main conclusion of the paper is that the evidence about the UK concentration of wealth post-2000 is seriously incomplete and significant investment is necessary if we are to provide satisfactory answers to the three questions.
    Keywords: inequality; United Kingdom; wealth
    JEL: D3 H2
    Date: 2015–09
  19. By: Wang, Jinxian; Van Vliet, Olaf
    Abstract: Until recently, social assistance has received relatively little attention in the comparative welfare state literature, which is remarkable given its central function in combating poverty and pursuing social inclusion. This paper explores the developments of social assistance and minimum income benefits across 14 Western European countries, 12 Central and Eastern European countries and 7 non-European countries over the period 1990-2009. First, an institutional analysis shows that eligibility conditions, work requirements and benefit sanctions vary considerably across countries. Second, relying on new indicators, our analysis shows that real benefit levels increased in most countries, whilst the net income replacement rates declined on average. This development seems to fit with a ‘making work pay’ agenda. A subsequent qualitative analysis of the policies underlying the quantitative measures indicates that the declining replacement rates do not result from benefit cuts but from relatively larger wage increases. In addition, our policy analysis indicates that work requirements and benefit sanctions have become more activating in many countries. Third, the data indicate that social assistance benefits diverged across EU and other OECD countries between 1990 and 2009. Finally, this paper seeks to make a methodological contribution to the ongoing debate on the ‘dependent variable problem’ in the welfare state literature by analysing to what extent changes in quantitative indicators reflect actual policy changes.
    Keywords: social assistance benefit replacement rates, welfare state reform, social inclusion, convergence, dependent variable problem
    JEL: H53 H55 I31 I38
    Date: 2014–12–20
  20. By: Vimal Ranchhod (SALDRU, School of Economics, University of Cape Town); Arden Finn (SALDRU, School of Economics, University of Cape Town)
    Abstract: Our previous study of the effects of South Africa's Employment Tax Incentive (ETI) (Ranchhod and Finn, 2014) found that the ETI did not have a statistically significant impact on youth employment probabilities in the first six months of 2014. In this update we extend the period of analysis from six months to all twelve months of 2014 and find that this does not alter our qualitative findings. These are that the ETI has not resulted in a statistically significant change in the probability of young people finding jobs, despite its cost of R2 billion over the first year of its existence. Furthermore, there is no evidence to suggest that the introduction of the ETI resulted in an increase in the level of churning for youth in the labour market.
    Keywords: Youth, unemployment, South Africa, wage subsidy, employment tax incentive
    JEL: H25 H32 J38
    Date: 2015
  21. By: Wagener, Andreas; Zenker, Juliane
    Abstract: From 2009 to 2011, the Thai government implemented an income guarantee program for rice, tapioca and maize farmers. Essentially, this program added a non-negative but stochastic component to the incomes of registered farmers. We evaluate the impact of the program on risk attitudes and investment behavior of small-scale rice farmers in relatively poor North-eastern Thailand. To control for self-selection into the scheme, we use propensity score matching. We find that that participation in the program significantly makes farmers less risk-averse, induces higher investments and boosts incomes. Medium-term effects are stronger than short-term effects.
    Keywords: Income support, farm households, risk attitude, investment, Thailand
    JEL: D13 H25 I38 Q12
    Date: 2015–09
  22. By: de Boer, Henk-Wim (CPB Netherlands Bureau for Economic Policy Analysis); Jongen, Egbert L. W. (CPB Netherlands Bureau for Economic Policy Analysis); Kabátek, Jan (Tilburg University)
    Abstract: To promote the labor participation of parents with young children, governments employ a number of fiscal instruments. Prominent examples are childcare subsidies and in-work benefits. However, which policy works best for employment is largely unknown. We study the effectiveness of different fiscal stimuli in an empirical model of household labor supply and childcare use. We use a large and rich administrative data set for the Netherlands. Large-scale reforms in childcare subsidies and in-work benefits in the data period facilitate the identification of the structural parameters. We find that an in-work benefit for secondary earners that increases with income is the most effective way to stimulate total hours worked. Childcare subsidies are less effective, as substitution of other types of care for formal care drives up public expenditures. In-work benefits that target both primary and secondary earners are much less effective, because primary earners are rather unresponsive to financial incentives.
    Keywords: discrete choice, household labor supply, latent classes, differences-in-differences, work and care policies
    JEL: C25 C52 H31 J22
    Date: 2015–08
  23. By: Nicola Fuchs-Schuendeln (Goethe University Frankfurt /Main); David Lagakos (University of California, San Diego); Alexander Bick (Arizona State University)
    Abstract: How do average hours worked vary with income per capita? Using international household survey data, we document that average hours worked per adult are substantially higher in poor countries than in rich countries. This pattern is shaped by differences along both the extensive margin (employment rates) and intensive margin (hours per employed). Employment rates are decreasing and convex in income per capita, while hours per employed are hump-shaped in income per capita. We explain these facts using a simple model with subsistence needs in preferences and heterogeneity in the cost of supplying labor across individuals. Countries differ only by aggregate productivity. The model predicts that as aggregate productivity falls and consumption nears the subsistence level, individuals with high costs of supplying labor become employed but supply relatively few hours. This leads to employment rates that are convex and decreasing in income, and hours worked per employed that are hump-shaped in income, as in the data. An implication of our model and empirical findings is that welfare differences across countries are substantially larger than suggested by income differences.
    Date: 2015
  24. By: Vivekinan Ashok; Ilyana Kuziemko; Ebonya Washington
    Abstract: Despite the large increases in economic inequality since 1970, American survey respondents exhibit no increase in support for redistribution, in contrast to the predictions from standard theories of redistributive preferences. We replicate these results but further demonstrate substantial heterogeneity by demographic groups. In particular, the two groups who have most moved against income redistribution are the elderly and African-Americans. We find little evidence that these subgroup trends are explained by relative economic gains or growing cultural conservatism, two common explanations. We further show that the elderly trend is uniquely American, at least relative to other developed countries with comparable survey data. While we are unable to provide definitive evidence on the cause of these two groups' declining redistributive support, we offer additional correlations which may offer fruitful directions for future research on the topic. One story consistent with the data on elderly trends is that older Americans worry that redistribution will come at their expense, in particular via cuts to Medicare. We find that the elderly have grown increasingly opposed to government provision of health insurance and that controlling for this tendency explains about 40% of their declining support for redistribution. For blacks, controlling for their declining support of race-targeted aid explains nearly 45% of their differential decline in redistributive preferences (raising the question of why support for race-targeted aid has fallen during a period when black economic catch-up to whites has stalled).
    JEL: D63 H23 J14 J15
    Date: 2015–09
  25. By: Hebous, Shafik; Weichenrieder, Alfons J.
    Abstract: There is a large, but yet growing debate about the need to complement the European monetary union with a stronger fiscal union. This paper reviews the potential trade-offs between effectiveness, moral hazard problems, and permanent redistribution. In particular, we contribute to the question of how member states may be willing to enter into a stronger fiscal union if the evolution of this union may imply large redistribution under incomplete contracting. We discuss clawback mechanisms that have been suggested in the literature, but conclude that clawbacks are undesirable, as they would essentially destroy the insurance value of a fiscal union. Instead, we propose that a clearly defined exit option as a guarantee against involuntary redistribution can make entry into a stronger fiscal union less risky and hence more attractive for member states.
    Keywords: EMU,Eurozone,European unemployment insurance,fiscal transfers
    JEL: H1 H7
    Date: 2015
  26. By: Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
    Abstract: In this paper, we assess the impact of major German structural reforms from 1999 to 2008 on key macroeconomic variables. By many, these reforms, especially the Hartz reforms on the labor market, are considered to be the root of observed imbalances in the Euro Area. Our simulations within a two-country monetary union DSGE model show that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German current account was only minor. Most importantly, the rest of the Euro Area benefited from positive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area. Further simulations highlight the importance of increased savings preferences in Germany to explain the latter.
    Keywords: Fiscal Policy,Labor Market Reforms,DSGE Modeling,Macroeconomics
    JEL: H2 J6 E32 E62
    Date: 2015
  27. By: Hebous, Shafik; Weichenrieder, Alfons J.
    Abstract: There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.
    Keywords: fiscal union,asymmetric shocks,federal transfers,optimum currency area
    JEL: H50 H60
    Date: 2015
  28. By: Christopher Avery; Parag A. Pathak
    Abstract: School choice systems aspire to delink residential location and school assignments by allowing children to apply to schools outside of their neighborhood. However, the introduction of choice programs affect incentives to live in certain neighborhoods, which may undermine the goals of choice programs. We investigate this possibility by developing a model of public school and residential choice. We consider two variants, one with an exogenous outside option and one endogenizing the outside option by considering interactions between two adjacent towns. In both cases, school choice rules narrow the range between the highest and lowest quality schools compared to neighborhood assignment rules, and these changes in school quality are capitalized into equilibrium housing prices. This compressed distribution generates incentives for both the highest and lowest types to move out of cities with school choice, typically producing worse outcomes for low types than neighborhood assignment rules. Paradoxically, even when choice results in improvement in the worst performing schools, the lowest type residents may not benefit.
    JEL: H44 I20
    Date: 2015–09
  29. By: Hans Gersbach (ETH Zurich, Switzerland); Philippe Muller (ETH Zurich, Switzerland); Oriol Tejada (ETH Zurich, Switzerland)
    Abstract: We develop and study a two-period model of political competition with office- and policymotivated candidates, in which (i) changes of policies impose costs on all individuals and (ii) such costs increase with the magnitude of the policy change. We show that there is an optimal positive level of costs of change that minimizes policy polarization and maximizes welfare. One interpretation of this finding is that societies with intermediate levels of conservatism achieve the highest welfare and the lowest polarization levels. We apply our model to the design of optimal re-election hurdles. In particular, we show that raising the vote-share needed for re-election above 50% weakly reduces policy polarization and tends to increase welfare. Furthermore, we identify circumstances where the optimal re-election hurdle is strictly larger than 50%.
    Keywords: elections, democracy, political polarization, costs of change, re-election hurdles, political contracts
    JEL: D7 H4
    Date: 2015–09

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